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The Equality Multiplier: How Wage Setting and Welfare Spending Make Similar Countries Diverge

Author

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  • Barth, Erling

    (Institute for Social Research, Oslo)

  • Moene, Karl Ove

    (University of Oslo)

Abstract

The complementarity between wage setting and welfare spending can explain how almost equally rich countries differ in economic and social equality among their citizens. More wage equality increases the welfare generosity via political competition in elections. A more generous welfare state fuels wage equality via an empowerment of weak groups in the labor market. Together the two effects generate a cumulative process that adds up to a social multiplier explaining how equality multiplies. Using data on 18 OECD countries over the period 1976-2002 (determined by the availability of the generosity index of welfare spending) we test the main predictions of the model and identify a sizeable magnitude of the equality multiplier. We obtain additional support by using spending data to extend the panel up to 2007, and by applying another data set for the US over the period 1945-2001.

Suggested Citation

  • Barth, Erling & Moene, Karl Ove, 2012. "The Equality Multiplier: How Wage Setting and Welfare Spending Make Similar Countries Diverge," IZA Discussion Papers 6494, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp6494
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    1. An equality multiplier?
      by chris dillow in Stumbling and Mumbling on 2012-05-15 18:57:53

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    More about this item

    Keywords

    wage inequality; welfare state;

    JEL classification:

    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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